India’s large corporate houses need to embrace ethics: Tarun Khanna

Tarun Khanna, Jorge Paulo Lemann professor at the Harvard Business School and director at Harvard University’s South Asia Institute, holds forth on failure of corporate governance in India’s top companies

Mumbai: India’s large corporates need to embrace ethics, says Tarun Khanna, Jorge Paulo Lemann professor at the Harvard Business School and director at Harvard University’s South Asia Institute, told Mint on the sidelines of the school’s Creating Emerging Markets (CEM): Lessons from History conference on Monday.

Khanna’s statements come at a time when India’s top companies are facing corporate governance issues and investors are also questioning the role of independent directors on the board. For instance the bitter board room battle at Tata Sons Ltd has seen former chairman Cyrus Mistry complain of mismanagement and corporate governance failures within the company. Failure of corporate governance is the key theme at the heart of the matter at India’s second-largest information technology company Infosys Ltd; where co-founder and former chairman N.R. Narayana Murthy and other founding members have raised questions about exponential raise in compensation for chief executive officer Vishal Sikka and the high severance payment for two top-level executives.

Khanna, who is leading the business school’s effort along with professor Geoffrey Jones, Isidor Straus Professor of Business History, and faculty chair of the School’s Business History Initiative on CEM, a archive with over 100 interviews conducted in nearly 20 countries around the world, also spoke about the need to review risk-reward compensation of independent directors.

“The Indian regulator has taken a hugely absurd position that makes independent directors bears a lot of the liabilities. However, he is not compensated for bearing these liabilities and if this is not re-looked at then we will not have talented people going into these situations,” said Khanna.

“The laws in India for independent directors is among the toughest in the world,” said Gita Piramal, a business historian and post-doctoral fellow at Oxford University. Independent directors have to sign declarations and give undertakings they could risk going to jail if the company is found to be in the wrong. “We are required to know every financial detail of the company. This is impossible,” said Piramal.

To be sure, the draconian law has led to the flight of the best corporate talent, particularly at the CEO level. “Nearly 200 people have left India in last four years to go to Singapore as they are unable to deal with regulatory environment,” said Piramal.

The Tata-Mistry spat has also put a spotlight on the vulnerability of India’s independent company directors who stand-up to, or take on a dominant shareholder. Analjit Singh and Darius Pandole, independent directors on the board of Tata Global Beverages Ltd; quit following the removal of Mistry as chairman.

Meanwhile the salt-to-software conglomerate removed independent director Nusli Wadia from the boards of three of its companies Tata Steel Ltd, Tata Motors Ltd and Tata Chemicals Ltd after the former spoke of lack of corporate governance and violation of insider trading norms by Tata Sons Ltd and trustees of Tata Trusts.